ALIS: Hard questions for Wall Street investors
01 FEBRUARY 2016 9:05 AM
Investment bankers addressed issues ranging from stock fluctuations to megamerger rationale at the Americas Lodging Investment Summit.
LOS ANGELES—Fluctuations in hotel stock performance have characterized the start of 2016, and that, coupled with the real-estate-investment-trust retreat the industry saw in 2015, has put the Wall Street outlook for the hotel industry top of mind.
- Read complete coverage of ALIS 2016 here.
Investment bankers speaking on a panel titled “Wall Street outlook—Near the peak or still a long way to go?” at the Americas Lodging Investment Summit addressed the questions many have been asking about stock volatility, megamergers and the role offshore investment is playing in the United States.
Why are investors running from hotel stocks when fundamentals are so good?
“If you put yourself in the mindset of a public investor, you can see that hotel stocks have greater growth than GDP, but they’re slowing. That’s concerning,” said Jeffrey Horowitz, global head of real estate at Bank of America. “(Investors) worry they could lose a lot of money very quickly. Investors tend to go where the trade is working—real estate with longer-term leases, like self-storage—and they don’t care about value.”
“We’ve seen investors leave the lodging space now and I think they’re a little nervous,” he said. “They might wait for the cycle to come back around.”
Christopher Jordan, EVP of Wells Fargo, said investors are pulling back in general as they watch and wait to make decisions, which often are based on short-term thinking.
Horowitz agreed, reminding panel attendees that investor mindset often can be focused on the short term—and on New York City.
“Many of these investors sit in New York City, which has been overrun with supply,” he said. “They look at STR data, which had revenue per available room in New York down for the first two weeks in January, and they’re going to focus on short-term data, on quarterly earnings data, to see when they can come back in the market.” (STR is the parent company of Hotel News Now.)
How does offshore investment money factor in?
Ben Leahy, managing director of Goldman Sachs & Company, said his company has seen a slowdown of investment money from the Middle East since oil prices started dropping, but not from Asia.
“Asia has been more consistent in bids and activity,” he said.
Lawrence Kwon, managing director at Moelis & Company, said his company hasn’t seen a slowdown in interest from Chinese investors, but other factors are at play.
“Nothing happens quickly; a lot is, ‘Let’s wait and see what happens,’” he said. “They’re not as primed for quick moves and judgments like Western markets are, yet they still want to be very aggressive about outbound transactions.”
Leahy said U.S. regulatory processes also present a challenge for Chinese investors in the hotel space, and that could have been a factor in competition for Starwood Hotels & Resorts Worldwide.
“The Chinese can bid, but it can be tough to close a deal,” he said.
What are the drivers of the significant hotel transactions that have been announced in recent months, such as the Marriott/Starwood deal and the AccorHotels/FRHI deal?
Leahy said he thinks both major deals should go through as planned, in part because both involve stocks.
“Given the way stocks have performed, I don’t see a lot of disruption to those deals,” he said. “Had they been cash bids, there would be more discussion.”
Jordan said investors see deals like this as having two rationales: an offensive one and a defensive one.
“The offensive is synergies: Marriott can control 30 brands and remove a major competitor,” he said. “Then of course there’s the defensive rationale, which is positioning, scale, bulking up and strengthening competitive positioning against disruptors like Airbnb and Google. They view Google as their biggest threat, not Hilton.”